Low-Income Housing Tax Credit (LIHTC)

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Low-Income Housing Tax Credit (LIHTC)

What Is the Low-Income Housing Tax Credit (LIHTC)?

The Low-Income Housing Tax Credit (LIHTC) is a tax credit that encourages homes developers to build, buy, or remodel housing for low-income people and families. The Tax Reform Act of 1986 included the Low-Income Housing Tax Credit. 1

Residents must meet certain criteria, including maximum income guidelines, in order to benefit from these types of housing projects.

Key Takeaways

  • The Low-Income Housing Tax Credit (LIHTC) provides a 10-year tax credit to projects that build low-income housing. 2
  • The LIHTC is handled by the federal government, and monies are distributed to states according on population.
  • To qualify for the LIHTC, a project must agree to lease to tenants earning less than the area’s median income for a period of 15 years. 3
  • Typically, at the state level, there are more qualifying projects vying for credits than credits available.

Understanding the Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit offers an additional income incentive to people who invest in low-income housing developments. Its goal is to encourage the construction of additional affordable housing for low- and middle-income families in places that would otherwise be out of reach. Multi-family homes are often eligible for the Low-Income Housing Tax Credit.

Credits are classified into two sorts. The first is a 9% credit that may only be utilized if no other credits or government subsidies are applied to the construction project. The second form is a 4% credit, which may be combined with other tax breaks. These credits are applied over a ten-year period and may cover almost all of the building’s taxable expenses. 4

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The federal government distributes tax credits to each state. Then, each state may decide which developers can use these credits for their housing developments. Because there are more applications than available building permits, not every developer or investor will be able to take advantage of this scheme.

Qualifying for the Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit is available to a broad range of properties, however there are more projects applying for credits than there are available, since credits are granted depending on state population. A project must fulfill one of the following standards to be eligible for the LIHTC:

  1. Tenants earning 50% or less of the regional median income based on family size are renting 20% or more of the rental units. 5
  2. Tenants earning 60% or less of the regional median income based on family size are renting 40% or more of the rental units. 5
  3. At least 40% of the rental units are leased to renters earning no more than 60% of the area’s median income, and no units are rented to tenants earning more than 80% of the median income. 2

For a period of 15 years, all projects receiving the LIHTC must continue to fulfill one of these income standards. If the project fails to meet the requirements, the tax credit might be reclaimed. One typical complaint of the tax credit is that many nice houses become inaccessible to low-income people once the 15-year term has passed.

Support for People Looking for Low Income Housing

Any housing project or residential building that rents units to tenants who qualify for reduced rent based on income and family size, or who receive a federal stipend to help make their monthly rental payment, is considered low-income housing. These residential units may be administered by a housing authority or privately managed by landlords or rental companies that take a government-issued payment in addition to their tenants’ monthly payment.

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While the Low-Income Housing Tax Credit is meant to encourage the construction of additional low-income housing, there are other sorts of assistance available to persons looking for low-income housing. The Department of Housing and Urban Development provides low-income housing subsidies (HUD).

The income criteria are available on HUD’s website and are subject to change if earnings rise or fall in a certain location. To qualify, a prospective tenant must earn less than 50% of the area’s median income. While the assistance is offered to both single tenants and families, there are requirements for room counts in prospective dwellings, and single renters may be rejected from a housing project owing to a shortage of appropriately sized units. 6

Low-income housing is not the same as affordable housing, which is for families that spend more than 30% of their income on housing. 7

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